Compound Interest Without Selling of Stock

I just received an email from Will regarding CITISEC EIP, here you go:

"Gusto ko po sanang kunin ang advise nyo tungkol sa CITISEC EIP. Sabi po duon na maganda daw po ang PESO COST SAVING investment na long term. Naintindihan ko na po yuon pero sabi din nila na dahil long term e gagana ang "compounding" duon. Hindi ko pa maintindihan kung paano po sya mag compound kung hindi mo naman ibebenta. Oo nadadagdagan ang pera mo kasi bumibili ka monthly at lets say nag appreciate ang stock mo pero paano po mag compound kung hindi mo naman ibebenta dahil nga long term? Pwede nyo po ba ako paliwanagan bago ako mag start ng account."

As a start, I would like to impart that I am fascinated in compounding interest. I have always wanted to find a way years ago on how to increase my funds by reinvesting the interest on my money. Obviously, simple interest won’t work because it doesn’t include my earned profits every year in the computation of interest. Compounding interest suits my financial objective of increasing my money’s value every year. Allegedly, Albert Einstein said the compounding interest is man’s greatest invention. How come such a great scientist will utter those words? Maybe because compounding interest increases your money exponentially taking into account your principal as well as the profits in the computation of the interest.

Compounding interest is computed by adding the profits of the principal to arrive at the succeeding interest.

Please take a look at the screenshot I got from the EIP pages of COL and see the difference between the simple interest and compound interest. In simple interest, your profit every year is always 7,000 pesos, it never increased. However in compounding interest, your profit every year is always increasing. The reason of increased profit every year is that the interests you earned every year are being added (reinvested) in the computation of the succeeding interest. As time passes by every year, your profits increases.

Regarding your question on how compounding works without selling a stock every year, please take a look below on the computation I did in compounding interest.

For example, we bought 1 share of Globe worth 1,000 pesos today. Every year the stock is growing at a 7% rate.

In Dec 31, 2012, your profit is 70 pesos (1,000x7%).

In Dec 31, 2013, Globe shares increased by 7% again, your 2013 profit is now 1,144.90 (1,070x7%). We used 1,070 pesos in the computation because that is the price of Globe as of Dec 31, 2012. Remember, the compounding interest used by COL in the above screenshot is annual. Also there is no selling transaction here yet.

In Dec 31, 2014, Globe shares increased by 7% again. Your 2014 profit is now 1,225.40 (1,144.90x7%). We used 1,225.40 because that is the price of Globe as of Dec 31, 2013. Whatever is the last price every Dec 31, that will be the basis of the interest computation. Again, no selling of sock is involved here. 

Interest   Globe Price   Today                        -                     1,000.00 31-Dec-12                70.00                   1,070.00 31-Dec-13                74.90                   1,144.90 31-Dec-14                80.14                   1,225.04